# Amicus Curiae Brief — New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co.

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 1995
- **Citation:** 514 U.S. 645

## Text

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~ ~ Py Mipreme Court, U.s,
i/ - _" F I L FE D
Nos. 93-1408, 93-1414, 93-1415] wow a6 1994 |
|

IN THE OFFICE OF THE CLE... |
Supreme Court of the United States —

Ocroser Term, 1994

NEW YORK STATE CONFERENCE OF BLUE CROSS
& BLUE SHIELD PLANS, et al.,

Petitioners,
vs.
TRAVELERS INSURANCE CO., et al..
Respondents.

(Caption Continued on Reverse Side of Cover)

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT
OF APPEALS FOR THE SECOND CIRCUIT

BRIEF OF THE AMERICAN HOSPITAL ASSOCIATION.

THE MARYLAND HOSPITAL ASSOCIATION, INC., AND

THE MASSACHUSETTS HOSPITAL ASSOCIATION, INC.
AS AMICI CURIAE IN SUPPORT OF PETITIONERS

Of Counsel: PeTrer F. NADEL
FReDRIC J. ENTIN Counsel Of Record
James A. HENDERSON Davin A. FLORMAN
Marcaret J. Harpy JoserpH V. WILLEY
AMERICAN HospPITAL BARBARA QUACKENBOS

ASSOCIATION ROSENMAN & COLIN

One North Franklin 575 Madison Avenue
Chicago, Illinois 60606 New York, New York 10022
(312) 422-3000 (212) 940-8800

(Counsel Continued on Attorneys for the American
Reverse Side of Cover) Hospital Association, the

Maryland Hospital
Association, Inc., and the
Massachusetts Hospital
Association, Inc.

Oca - - em meh -_

MARIO CUOMO, GOVERNOR OF NEW YORK. et al..
Petitioners.
VS.

TRAVELERS INSURANCE CoO., et al.,

Respondents.

HOSPITAL ASSOCIATION OF NEW YORK STATE.
Petitioner.
VS.

TRAVELERS INSURANCE CoO., et al.,

Respondents.

Of Counsel:
JEROME G. GERAGHTY
FRANCINE R. STRAUSS
BLADES & ROSENFELD, P.A.
1200 Sun Life Building
200 South Charles Street
Baltimore, Maryland 2120]
(410) 539-7558

WILLIAM T. McGralIL
DorotHy GRANDOLFI Wacc
Amy L. STAMPFER
MASSACHUSETTS HospPITAL
ASSOCIATION, INC.
5S New England Executive Park
Burlington, Massachusetts 01803
(617) 272-8000

o i” | My) uy a) Da wy
wa 1 © a

J)

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|
i
TABLE OF CONTENTS
Page

NT iii
Interest of the Amici Curiae ................ccccccececesesecceseceseeees l

. Introduction and Summary of Argument......................... l

| ARGUMENT

I. ERISA WAS NOT INTENDED TO PREEMPT
| STATE LAWS THAT AFFECT THE PRICE OF
| SERVICES TO PLAN PARTICIPANTS................... 3

Il. ERISA DOES NOT PREEMPT A STATE’S
POWER TO ESTABLISH UNIFORM

| i 7
A. ERISA Does Not Preempt Common Law
| Causes of Action Against Plan Participants ..... 8
| S . SD 1]
fa] 1. Maximum Charges..................:.:cccceceeseeeseees 12
)
; nD 13
C. The Indirect Economic Impact of State Rate-
Setting Systems Is Alone Insufficient to
Result im Preemption .............0.c.ccececceressesesserees 15
| 1. Indirect Economic Impact, National
. Uniformity, and Administrative Burdens... 16
4 2. Indirect Economic Impact and Plan
| EE SL 17
D. Congress Did Not Intend to Limit States’
Control of Hospital Costs and Rates................. 21
| Ii]. ERISA DOES NOT PREEMPT A STATE’S
| POWER TO ESTABLISH DISPARATE
| a 23

At he

ii
Page
A. Disparate Rates and the Goals of State Rate-
ae See 23
B. The Differentials Do Not Relate to ERISA
Will siniirsinindansgsecuhidtepdnedatitiasbias tebe ti sais 26
|. “Reference To” and “Depend Upon”.......... 26
2. Structure, Administration and Economic
i asse-cisneinitiiapiiniiatiniepinighebeaisthtiadig a iia 28

CD cccidinntindiiccindidit te i a 30

iii
TABLE OF AUTHORITIES

Cases

Aetna Life Ins. Co. v. Borges, 869 F.2d 142 (2d Cir.),
cert. denied, 493 U.S. 811 (1989).............cccccccceeeee. 5

Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504
RII a Ui chcicdaieinaitaleiliadbdonaianaibaaansinabiiiuemlbsbdasiiinbaisticcbecees

Beth Israel Med. Ctr. v. Sciuto, 1993 WL 258636
RI CEE Sa Ae

Connecticut Gen. Life Ins. Co., et al. v. Cuomo, No.
a cietliamimnenecnsenes

Connecticut Hosp. Ass'n v. Pogue, et al., No. 3:94
eg TT SR

Diduck v. Kaszycki & Sons Contractors, Inc., 974
I

District of Columbia v. Greater Wash. Bd. of Trade,
a! ee

E-Systems, Inc. v. Pogue, 929 F.2d 1100 (Sth Cir.),
cert. denied, ___ U.S.__, 112 S. Ct. 585 (1991).. 15n

Firestone Tire & Rubber Co. v. Neusser, 810 F.2d 550
EE RE SP Ce Te er a

Forbus v. Sears Roebuck & Co., 30 F.2d 1402 (11th

Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987)... 6, 10n,
16

Gaston Mem. Hosp. Home Health Serv. Inc. v.
Bridgestone/Firestone, Inc., 830 F. Supp. 287
Sas te adinctnannneatnnsechdnbibinbqnansinneteneniencenees

General Electric Co. v. New York State Dep't of
Labor, 891 F.2d 25 (2d Cir. 1989) ..0.0........ccccceeeeees

iv

Page

Hillsborough County v. Automated Medical Lab. Inc..
ok Ee ee 13

Hospice of Metropolitan Denver, Inc. v. Group Health
Ins., 944 F.2d 752 (10th Cir. 1991) (per curiam)... 9, 11

Ingersoll-Rand Co. v. McClendon, 498 U.S. 133

ea ee aCe ae ee 10, 18n
Lane v. Goren, 743 F.2d 1337 (9th Cir. 1984).............. 18

Mackey v. Lanier Collection Agency & Service, Inc.,
I cctichitinniatiieninniiiatiatditeee 9, 13,
19,21, 27n

Malone v. White Motor Corp., 435 U.S. 497 (1978)... 5
McGuire v. Hughes, 207 N.Y. 516, 101 N.E. 460

ee sanaiineneinedisiinieaieiiie se ee 8n
Medical Society v. Cuomo, 976 F.2d 812 (2d Cir.

ESS Ree PR Li) Heel 13
Memorial Hosp. System v. Northbrook Life Ins. Co.,

904 F.2d 236 (Sth Cir. 1990) .......cccccccccccesceseeeeeees 9n, 11
Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S.

SERENE ST 5 5, 13

In re Michigan Carpenters Counsel Health & Welfare
Fund, 933 F.2d 376 (6th Cir.), cert. denied, sa

iF we , 15n
Monarch Cement Co. v. Lone Star Industries, 982
F.2d 1448 (10th Cir. 1992) 0000. ccccccecccceccecee ee. 10n

Morgan Guaranty Trust Co. v. Tax Appeals Tribunal
of Dep't of Taxation & Finance, 80 N.Y.2d 44,
SE Wee Ea Ie CED ccccnceccccnsesssnsinictilbidesenatetenen 15n

Mount Sinai Hosp. v. Burns, 138 Misc. 2d 381, 527
N.Y.S.2d 678 (N.Y. App. T. 1988) .0......0...cccccceceseee. 8n

National Carriers Conf. v. Heffernan, 440 F. Supp.
1280 (D. Conn. 1977)

National Elevator Indus., Inc. v. Calhoun, 957 F.2d
1555 (10th Cir.), cert. denied, U.S. _, 1135S.
Ct. 406 (1992)

New England Health Care Employees Union, Dist.
1199 v. Mount Sinai Hosp., 846 F. Supp. 190 (D.
Conn. 1994) (appeal docketed #94-7264) 7n, lin,

24n
NYSA-ILA Medical ¢ Clinical Serv. Fund v. Axelrod,
27 F.3d 823 (2d Cir. 1994)
Perkins v. Time Ins. Co., 898 F.2d 470 (Sth Cir. 1990). 10n
Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987) 9n, 13

Rebaldo v. Cuomo, 749 F.2d 133 (2d Cir. 1984),
cert. denied, 472 U.S. 1008 (1985)

20-21, 23n

Sanson v. General Motors Corp., 966 F.2d 618 (11th
Cir. 1992), cert. denied, U.S. _, 113 S. Ct.
1578 (1993)

St. Peter's Hosp. v. Hall, 102 Misc. 2d 73, 422
N.Y.S.2d 628 (N.Y. Sup. Ct. Albany Co. 1979)

Shaw v. Delta Air Lines, 463 U.S. 85 (1983)

Standard Oil Co. v. Agsalud, 633 F.2d 760 (9th Cir.
1980), summarily aff'd, 454 U.S. 801 (1981)

The Meadows v. Employers Health Ins., 826 F. Supp.
1225 (D. Ariz. 1993)

vi
Page
Travelers Ins. Co. v. Cuomo, et al., 813 F. Supp. 996
(S.D.N.Y.), aff'd, 14 F.3d 708 (2d Cir. 1993), cert.
granted, 1994 WL 82909, and granted sub nom.
N.¥.S. Conf. of Blue Cross & Blue Shield Plans v.
Travelers Ins. Co., 1994 WL 82902, and granted
in part sub nom. HANYS yv. Travelers Ins. Co.,
1994 WL 82910 (Oct. 7, 1994)... ccccccccccecceeeeees 2, 7n,
15, 15n, 18n,
21, 28-30n

Trustees Of & The Pension Hospitalization Benefit
Plan, et al. v. Cuomo, et al., 92 Civ. 5589

United Wire, Metal & Machine Health & Welfare
Fund v. Morristown Mem. Hosp., 995 F.2d 1179
(3d Cir.), cert. denied, 114 S. Ct. 382 and 114 S.

ae a Me pe a 2, 16-19,

27

Constitution and Statutes
ele te Mera A 12
ERISA § 2(b) (29 U.S.C. § 1001 (D)) oocceccccccccccccccees. 5
§ 514(a), (b) (29 U.S.C. § 1144)... 2, 4, 6,
10, 20,
and passim
2 Se ee LL ee 8n-9n,
18n
ES I AR ee ae 23n
Se ee teh athe 22
N.Y. Pub. Health L. § 2807-€(1)(b).......ccccccceccoccoceoeecess 26
I 29n

1

Interest of the Amici Curiae
Amici curiae the American Hospital Association (“AHA”),
Hospital Association, Inc., respectfully submit this brief in
support of the Petitioners. A!l parties have given written consent
to the filing of this brief, and the letters so stating have been filed
with the Clerk of the Court.

Founded in 1898, the AHA is the primary organization of
hospitals in the United States. Its institutional members include
approximately 80% of the nation’s hospitals, and nearly 50,000
health care professionals hold individual membership.

The AHA’s corporate mission is to promote the quality of
American health care ¢ for all people through leadership and
assistance to hospitals and other health care organizations. To
fulfill this mission, the AHA regularly participates in the judicial
and legislative arena to address important issues concerning
federal and state health care reform in general and hospital

regulation in particular. The Maryland Hospital Association and
the Massachusetts Hospital Association are the leading organiza-
tions of hospitals in their respective states and are independent
associations whose missions, goals, and concerns are allied with
those of the AHA in this matter.

As leaders in the health care field, and as representatives of
health care institutions whose continued survival and service to
society depend on equitable regulation, apportionment, and
reimbursement of necessary costs, amici are vitally concerned
that states retain the flexibility to assure equal access to afford-
able high-quality health care, a goal that will be seriously
undermined if the decision of the Second Circuit Court of
Appeals is permitted to stand.

Introduction and Summary of Argument

In light of the recent failure to enact comprehensive federal
health care reform legislation, and uncertainties as to the future
of such federal initiatives, it is likely that the states will be the
primary venue of continued reform efforts. New York State has

2

long been an innovative leader in attempting to provide
affordable and quality health care to all of its residents.

States’ efforts to implement comprehensive reform legisla-
tion, and their efforts to spread health care costs over the widest
possible base, have been significantly frustrated by the breadth
of ERISA’s preemption provision. State laws that, for example,
require employers to offer or pay for health benefits, or impose
mandated benefits on self-funded plans, or directly tax plans or
benefits, have all been held preempted.

The Court is not here called upon to read ERISA § 514(a)
more narrowly than heretofore. But this appeal does seek to
reverse a judicial extension of ERISA’s preemptive sweep that
erodes the states’ remaining flexibility to regulate and equitably
apportion the costs of hospital care among all payors without
reference or regard to their status as ERISA plans. An affir-
mance of the decision below could well leave states essentially
powerless to act in the health care field, a result that Congress
could not conceivably have intended and is, indeed, lirectly
contrary to its express intent.

In Rebaldo v. Cuomo, 749 F.2d 133 (2d Cir. 1984), cert.
denied, 472 U.S. 1008 (1985), New York’s statutory hospital
reimbursement system, which regulated the rates of all payors,
was upheld against a claim of ERISA preemption. Expressly
agreeing with Rebaldo’s analysis and reasoning, the Third
Circuit likewise held that New Jersey’s comprehensive
reimbursement statutes were not preempted. United Wire, Metal
& Machine Health & Welfare Fund v. Morristown Mem. Hosp.,
995 F.2d 1179 (3d Cir.), cert. denied, 114 S. Ct. 382 and 114 S.
Ct. 383 (1993). In the present case, the Second Circuit
invalidated the challenged portions of New York’s reim-
bursement statute and, in so doing, disagreed with United Wire
and disavowed its prior reasoning in Rebaldo. 14 F.3d 708, 714,
719-20.

The Petitions for Certiorari herein stressed this conflict in the
Circuit Courts and the national importance of the issue
presented. That issue is whether states have the power, in

3

general, to set hospital rates for patients who happen to be
ERISA plan participants. If all such state laws are preempted, it
is unnecessary to reach the question whether the particular New
York rate differentials invalidated below are lawful. It will,
however, become necessary in the future for the courts to
entertain innumerable ERISA challenges to a wide variety of
state laws that indirectly affect plans simply because they
potentially increase plans’ costs of doing business or potentially
decrease contributions to the plans.

We show below that a state’s exercise of its inherent police
powers to provide for the health and welfare of its citizens
through the establishment of mandatory hospital rates is not
preempted. First, the purpose of ERISA was not to regulate or
preempt generally applicable state laws that affect the price of
services to plan participants. Second, state hospital reimburse-
ment systems that establish uniform rates are not superseded
because (i) they do no more than substitute for the rights and
obligations between patient and hospital that exist under
common law; (ii) they do not impact upon ERISA plans other
than in a tenuous and remote manner; and (iii) Congress has
expressly encouraged states’ efforts to control costs through the
adoption of all-payor systems. Third, state reimbursement
systems that produce disparate rates — such as those resulting
from the differentials at issue — stand in no different position
vis-a-vis ERISA preemption than uniform rate systems; neither
relate to ERISA plans.

ARGUMENT
I

ERISA WAS NOT INTENDED TO PREEMPT
STATE LAWS THAT AFFECT THE PRICE OF
SERVICES TO PLAN PARTICIPANTS

Congress purposefully preempted broadly and this Court has
insisted upon an expansive reading of the statutory text. In
District of Columbia v. Greater Washington Board of Trade,

4

_US._ , 113 S. Ct. 580, 583 (1992), this Court summarized its
prior description of the breadth of ERISA § 514(a) as follows:

“We have repeatedly stated that a law ‘relate[s] to’ a
covered employee benefit plan for purposes of § 514(a)
‘if it has a connection with or reference to such a plan.’
Shaw, supra, 463 U.S. at 97. E.g., Ingersoll-Rand Co. v.
McClendon, 498 U.S. 133, 139 (1990); FMC Corp. v.
Holliday, 498 U.S. 52, 58 (1990); Mackey v. Lanier
Collection Agency & Service, Inc., 486 U.S. 825, 829
(1988); Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 47
(1987); Metropolitan Life Ins. Co. v. Massachusetts, 471
U.S. 724, 739 (1985). This reading is true to the ordinary
meaning of ‘relate to,’ see Black’s Law Dictionary 1288
(6th ed. 1990), and thus gives effect to the ‘deliberately
expansive’ language chosen by Congress. Pilot Life, su-
pra, 481 U.S. at 40. See also Morales v. Trans World
Airlines, Inc., 504 U.S. _, _ (1992). Under § 514(a),
ERISA pre-empts any state law that refers to or has a
connection with covered benefit plans (and that does not
fall within a § 514(b) exception) ‘even if the law is not
specifically designed to affect such plans, or the effect is
only indirect,’ Ingersoll-Rand, supra, 498 U.S. at 139,
and even if the law is ‘consistent with ERISA’s substan-
tive requirements, Metropolitan Life, supra, 471 U.S. at
739.

e ' Pre-emption does not occur, however, if the state law has only a
‘tenuous, remote, or peripheral’ connection with covered plans.
Shaw, 463 U.S., at 100, n.21, 103 S. Ct., at 2901, n.21, as is the case

with many laws of general applicability, see Mackey, 486 U.S. at
830-838, and n.i2, 108 S. Ct. at 2185-2190, and no. 12; cf. Ingersoll-

Rand, 498 U.S. at 139, 111 S. Ct. at_.”

In the present case, the Second Circuit has, in turn, given an
expansive reading to this Court’s pronouncements and has
reached a conclusion that is not only unsupported by any
holding or analysis of this Court, but produces a result that

5

Congress did not and, as a matter of “common sense,” could not
intend.

Because everything in the cosmos has, in some fashion, an
indirect “connection with” everything else, including New
York’s differentials and ERISA plans, the question in each case
is where the line should be drawn between those state actions
that do or do not affect plans in too tenuous a “manner.” It is the
nature of the relationship that is significant. “[A]s in any
preemption analysis, ‘the purpose of Congress is the ultimate
touchstone.’ ” Metropolitan Life Ins. Co. v. Massachusetts, 471
U.S. 724, 747 (1985), quoting Malone v. White Motor Corp.,
435 U.S. 497, 504 (1978).

The purpose of ERISA is set forth in the statute itself:

“[protecting] participants in employee benefit plans and
their beneficiaries, by requiring the disclosure and report-
ing to participants and beneficiaries of financial and other
information with respect thereto, by establishing stan-
dards of conduct, responsibility, and obligation for fiduci-
aries of employee benefit plans, and by providing for ap-
propriate remedies, sanctions and ready access to the
Federal courts.” [ERISA § 2(b), 29 U.S.C. § 1001(b).]

The object of protecting plan participants and the two means
by which such protection is to be afforded — disclosure and
fiduciary standards — are thus clear. But the fullest protection
accorded to plan participants was not intended to confer on them
some special advantage that nonparticipants do not enjoy in
matters unrelated to the operation and administration of plans.
Participants do not enjoy a “charmed existence that was never
contemplated by Congress.” Aetma Life Ins. Co. v. Borges, 869
F.2d 142, 145 (2d Cir.), cert. denied, 493 U.S. 811 (1989)
(quoting Rebaldo v. Cuomo, supra).

This Court has not limited ERISA’s preemptive sweep to
state laws that relate to the subject matters regulated by ERISA:
disclosure requirements or fiduciary standards. Also superseded
are those laws that impair the efficient operation of plans

6

through burdensome and potentially conflicting administrative
requirements. As explained in Fort Halifax Packing Co. v.
Coyne, 482 U.S. 1, 11 (1987), a “patch-work scheme of
regulation would introduce considerable inefficiencies in benefit
program operation, which might lead those employers with
existing plans to reduce benefits, and those without such plans to
refrain from adopting them.”

In precluding state interference with the operation and
administration of plans, it is significant that ERISA itself
imposes no substantive requirements on the content of plans.
Employers are free to establish and fund such plans at any level,
and plans are free to determine what type and extent of benefits
they will provide to their paruicipants. There are no maximum or
minimum requirements.

Although ERISA § 514(a) preempts state laws only “insofar
as” they relate to “plans,” as opposed to benefits, and the statute
does not mandate that any particular benefits must be offered,
Fort Halifax also held that such laws are preempted “if they
attempt to dictate what benefits shall be paid under a plan.” Jd. at
13 n.8. The Dissenting Opinion (id. at 26) did not disagree on
this point. It relied on Standard Oil Co. v. Agsalud, 633 F.2d
760, 766 (9th Cir. 1980), summarily aff'd, 454 U.S. 801 (1981),
as establishing that ERISA’s concern was not only with
uniformity in the administration of plans, but with “state statutes
which require employers to provide particular employee
benefits.”

The New York laws at issue here neither interfere with plan
administration nor require any particular benefits to be provided.
They are yet a further step removed and affect only the price of
hospital services to plan participants, which plans may choose to
cover in whole or in part. Even if such laws may indirectly
influence plans’ decisions as to the level of benefits, they indir-
ectly connect to plans in too tenuous a manner to result in

preemption.

7
II

ERISA DOES NOT PREEMPT A
STATE’S POWER TO ESTABLISH
UNIFORM HOSPITAL RATES

Respondents assert (Br. in Opp. 1, 4, 13, 18) that the State’s
general power to set hospital rates is neither challenged nor
undermined by the Second Circuit’s decision herein.' This
“concession” is made for two strategic purposes: First, they wish
to retain all of the benefits of State limitations on hospital costs
and rates while excising three provisions they find disagreeable
— the differentials — from the extensive and unified regulatory
scheme. More importantly, they seek to avoid an examination of
the issue of ERISA’s preemption of the State’s rate-setting
power because such an analysis dooms the challenge to the
differentials. The very reasons why the rate-setting power is not
preempted also demonstrate that when that power is exercised to
produce disparate rates, the same result obtains.

Accordingly, in order to determine whether Congress
intended to preempt the New York rate differentials here at
issue, we first address (i) the rights and obligations of the

' The District Court in the instant case observed in a dictum (813 F. Supp.
996, 1006) that preemption of the State’s rate-setting power was a
necessary consequence of its decision, but the Second Circuit did not
expressly comment on that view. However, in New England Health Care
Union v. Mount Sinai Hosp., 846 F. Supp. 190 (D. Conn. 1994) (appeal
docketed #94-7264), the District Court, adhering to its reading of the
Travelers Decision, invalidated Connecticut's statutory Uncompensated
Care Assessments (uniformly applicable to all nongovernmentally insured
patients) to the extent that such patients were plan participants. As a result
of that decision, Connecticut revised its statutes and the revisions are also
being challenged as preempted. Connecticut Hosp. Ass'n v. Pogue, et al.,
No. 3:94 CV 01224 (D. Conn.). In addition, other aspects of New York's
reimbursement system are under attack on preemption grounds in
Connecticut Gen. Life Ins. Co., et al. v. Cuomo, No. 93 Civ. 3648
(S.D.N.Y.) (balance billing law), and Trustees Of & The Pension
Hospitalization Benefit Plan, et al. v. Cuomo, et al., 92 Civ. 5589
(S.D.N.Y.) (bad debt and charity care funding provisions).

hospital and patient in the absence of any state regulation and (ii)
state reimbursement systems that establish uniform rates. In
Point III, we discuss reimbursement systems that, as in New
York, produce disparate rates.

In New York, and nationally, patients typically agree to pay
the hospitals’ charges pursuant to an agreement that is express or
implied by law. A hospital will usually accept assignment of a
patient’s health insurance, if any and from whatever source, but
the patient remains personally liable for whatever portion of the
hospital's bill remains unpaid by the insurer for any reason — be
it a deductible, coinsurance requirement, denial of coverage, or
an outright refusal to pay on any basis.

A state’s common law will provide the hospital with a cause
of action to recover against the patient for any unpaid portion of
the bill. In the absence of state regulation of charges, the courts
will enforce express contracts to pay the hospital’s self-
determined charges or allow recovery in quantum meruit for
implied contracts. In the latter case, the courts will determine the
“reasonable value” of services provided.”

Are these common law remedies unenforceable when the
patient happens to be an ERISA participant? Does it make a
difference that the state legislature establishes the hospital’s
charges rather than leaving that determination to the hospital
itself, or for a judge to determine on an ad hoc basis?

A. ERISA Does Not Preempt Common Law
Causes of Action Against Plan Participants
Although a state’s common law is as fully within ERISA’s
preemptive reach as are its statutes,’ there is no evidence that

? E.g., McGuire v. Hughes, 207 N.Y. 516, 519, 521, 101 N.E. 460 (1913);
Mount Sinai Hosp. v. Burns, 138 Misc. 2d 381, 527 N.Y.S.2d 678 (N.Y.
App. T. 1988); see St. Peter's Hosp. v. Hall, 102 Misc. 2d 73, 422
N.Y.S.2d 628 (N.Y. Sup. Ct. Albany Co. 1979) (“the charges are
commensurate with those of other area hospitals”).

> “State laws” preempted by ERISA include “all laws, decisions, rules,
regulations, or other State action having the effect of lav, of any State.”
(Footnote continued)

9

Congress intended to preempt state common law remedies
against patients for breach of their implied or express agree-
ments to pay the hospital simply because they happen to be plan
participants. To the contrary, suits against ERISA plans
themselves for “run-of-the-mill state-law claims such as unpaid
rents, failure to pay creditors, or even torts” are not preempted.
Mackey v. Lanier Collection Agency & Serv., Inc., 486 U.S. 825,
833 (1988). It has been repeatedly held that when plans
mistakenly confirm insurance coverage of a participant, and the
hospital provides services in reliance thereon, the state law claim
against the plan is not preempted. In Hospice of Metro Denver,
Inc. v. Group Health Ins., 944 F.2d 752 (10th Cir. 1991), the
Court found that the impact on the plan of permitting recovery
was too “tenuous, remote, or peripheral”; did not “affect the
structure, the administration or type of benefits” of the plan
(citing Rebaldo), did not threaten inconsistent State and local
regulation; and the Congressional purpose in enacting ERISA
was not transgressed. /d. at 754-55. “Preemption in this case
would stretch the ‘connected with or related to’ standard too

far.” Id. at 756.‘

If “run-of-the-mill” common law claims against plans for
misrepresentations of coverage are not preempted, a fortiori the
same result must apply when a plan participant is sued on his
express or implied agreement to pay for hospital services. The
rights and liabilities that inhere in the hospital-patient relation-
ship exist independently of the patient’s insurance, if any, or the
patient's relationship, if any, with an ERISA plan.

ERISA § 514(cX1), 29 U.S.C. § 1144(c\1). Common law causes of
action and remedies are thus included. See, ¢.g., Pilot Life ins. Co. v.
Dedeaux, 481 U.S. 41, 48 (1987).

* Accord Memorial Hosp. Sys. v. Northbrook Life Ins. Co., 904 F.2d 236
(Sth Cir. 1990); Beth Israel Med. Ctr. v. Sciuto, 1993 WL 258636
(S.D.N.Y. 1993); Gaston Mem. Hosp. Home Health Serv. Inc. v.
Bridgestone/Firestone, Inc., 830 F. Supp. 287 (W.D.N.C. 1993); The
Meadows v. Employers Health Ins., 826 F. Supp. 1225 (D. Ariz. 1993).

10
_

In Ingersoll-Rand v. McClendon, 498 U.S. 133, 139-40
(1990), the Court reasoned that a state common law claim will
be preempted if the “existence of a pension plan is a critical
factor in determining liability”; if the “cause of action relates not
merely to pension benefits, but to the essence of the pension
plan itself”; and if “a plaintiff must plead, and the court must
find, that an ERISA plan exists” to establish liability.

This analysis has consistently been applied to determine
whether a state cause of action is preempted and is entirely in
keeping with the plain meaning of the statute. State laws are
preempted “insofar as they may now or hereafter relate to any
employee benefit plan.” ERISA § 514(a) (emphasis added).°

The hospital's common law cause of action has no
“connection with” ERISA plans because the existence of any
type of insurance, whether provided by a plan or otherwise, or
its absence, is wholly irrelevant to the patient’s individual
obligation to pay. The hospital need not plead and the court need

* See, ¢.g., Fort Halifax Co. v. Coyne, supra, 482 U.S. at 23 (state sever-
ance payment law did not speak to plans and was not preempted); Diduck
v. Kaszycki & Sons Contractors, Inc., 974 F.2d 270, 287-88 (2d Cir. 1992)
(fraud claim preempted because it concerns the conduct of a fiduciary and
third party “in relation to the plan. . . . A state common law action which
merely amounts to an alternative theory of recovery for conduct actionable
under ERISA is preempted”); Perkins v. Time Ins. Co., 898 F.2d 470 (Sth
Cir. 1990) (fraud claim against insurance agent not preempted because he
was not an ERISA entity); Monarch Cement Co. v. Lone Star Industries,
982 F.2d 1448, 1453 (10th Cir. 1992) (contract claim not preempted
because defendant, who agreed to fund pension plan, was liable as a seller
of a business rather than a principal ERISA entity); Compare Sanson v.
General Motors Corp., 966 F.2d 618, 621 (11th Cir. 1992), cert. denied,
_US._ , 113 S. Ct. 1578 (1993) (claim of fraudulently inducing
employees to resign so as to forego retirement benefits preempted because
existence of a plan was “critical” to claim) with Forbus v. Sears Roebuck
& Co., 30 F.3d 1402, 1406-07 (11th Cir. 1994) (misrepresentation claim
concerning elimination of jobs, not plan benefits, not preempted; state
fraud claim functions irrespective of an ERISA plan and “it would defy
common sense to allow ERISA to preempt”).

11

not find that an ERISA plan exists to establish liability. The
patient is being sued in his or her capacity as a patient who has
agreed to pay, not as a plan participant.

Preemption of state common law causes of action to enforce
express or implied contracts would confer a “charmed exis-
tence” on plan participants (Rebaldo at 139) and lead to absurd
results that Congress could never have intended. If a hospital
simply refused to provide care to ERISA plan participants unless
payment were received in advance, there would be no state law
to apply or preempt. But requiring such “up front” payment
“does not serve, but rather defeats, the purpose of Congress in
enacting ERISA.” Memorial Hosp. Sys. v. Northbrook Life Ins.
Co., supra, 904 F.2d at 247; see Beth Israel Med. Ctr. v. Sciuto,
supra, 1993 WL 258636 at *4; Hospice of Metro Denver, Inc. v.
Group Health Ins., supra, 944 F.2d at 754-56.

Accordingly, the hospital’s common law right to collect its
charges from a patient subsists notwithstanding the patient’s
Status as a plan participant and notwithstanding a plan’s decision

to indemnify the patient for all or part of his liability to the
hospital.° The same is equally true when the hospital’s charges
are determined by a state.

B. State Rate-Setting

Codifying the common law, a state statute could simply
provide that, “in the absence of an express contract, patients are
liable for the reasonable value of the services provided.” There
can be no difference, for preemption purposes, between the

* In New England Health Care Employees Union v. Mount Sinai Hosp.,
supra, the District Court, on the basis of the Second Circuit's decision
here, not only invalidated the State’s Uncompensated Care Assessments,
but also enjoined the hospitals from collecting the assessments from the
pay whatever portion of the hospital's bill that was not paid by the insurer.
846 F. Supp. at 199-200. This unwarranted preemption of common law
rights is more than an analytical tool, but has become a reality in
Connecticut.

12

common law and its statutory embodiment. Nor can there be a
difference, if “common sense” illuminates Congressional intent,
that the “reasonable value” is legislatively determined pursuant
to a detailed statutory reimbursement formula rather than by a
judge on an ad hoc basis.

New York’s reimbursement system, unlike the common law,
precludes enforcement of express contracts to pay a negotiated
rate (except in the case of HMOs). The statute limits the
hospital’s right to receive more, and the patient’s right to pay
less, than the established rate. The result is similar to that
obtaining under quantum meruit, where a court fixes the
maximum and minimum payment at the reasonable value based
on costs.’ Does ERISA preempt either (or both) of these
limitations?

l. Maximum Charges

In discharge of its Constitutional duty to enact laws that
protect and promote “the health of the inhabitants of the State”
(N.Y. Const., Art. XVII, § 3), the New York State Legislature
has engaged in the most extensive regulation of hospitals,
specifying permitted, mandatory and/or prohibited activities,
costs and charges in the fullest exercise of its police powers.

The regulation of hospitals’ activities has among its goals the
control of costs so as to make health care affordable. States’
efforts to control rising health care costs is a national phenome-
non, and “the regulation of public health and the cost of medical
care are virtual paradigms of matters traditionally within the

” New York’s statutory reimbursement formula takes a fundamentally
different approach. In an effort to coerce hospitals to reduce and control
costs, the prospective rate represents what the State determines the
services should cost, and the actual or reasonable costs incurred are only
tangentially implicated. If hospitals incur costs higher than the prospective
rate, they are financially penalized; if below, they are rewarded for their
efficiency. Beyond these incentives, the State regulates what costs
hospitals are permitted to incur: the capital costs of an unauthorized MRI
machine are not reimbursable.

13

police powers of the state.” Medical Soc’y v. Cuomo, 976 F.2d
812, 816 (2d Cir. 1992), citing Hillsborough County v.
Automated Medical Lab. Inc., 471 U.S. 701, 719 (1985). Cost
control results in the establishment of the maximum amounts
hospitals can charge. Hospitals in a strong bargaining position
cannot insist on more. Does ERISA preempt such state
limitations on what hospitals can charge?

It is no answer, for ERISA preemption purposes, that a state
law benefits, rather than burdens, a Plan. All state laws that
“relate to” a plan are preempted, “even including state laws that
are consistent with ERISA’s‘ substantive requirements.”
Metropolitan Life Ins. Co. v. Massachusetts, supra, 471 U.S. at
739; see Mackey v. Lanier Collection Agency & Serv., Inc.,
supra, 486 U.S. at 829 (statute that exempted ERISA Plans from
garnishment “to help effectuate ERISA’s underlying purposes”
held preempted).

The only argument that can be made in support of preemp-

tion of state limitations on charges is that Congress intended to
preempt broadly. But if there must also be an “unmistakable”
Congressional intent to intrude on the states’ police powers
(Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 522 (1981)),
and “relate to” must be given its “common sense” meaning (Pilot
Life Ins. Co. v. Dedeaux, supra, 481 U.S. at 47), then it is im-
possible to conclude that Congress actually intended to preclude
state limitations on hospital charges. Not only would such a
result not bolster Congress’s purpose in enacting ERISA, it is
diametrically opposed to decades of Congressional action en-
couraging state control of health care costs (see pp. 21-23, infra).

2. Minimum Charges

The affordability of health care is but one goal of state
regulation. Access to quality health care is another. Also in the
exercise of its police powers, a state attempts to assure access to
and the delivery of quality care by precluding payment of less
than the established rate. Hospitals must be financially viable to
provide quality care and meet the niagara of regulatory mandates

14

imposed on them — from emergency care to staffing levels to
infectious waste disposal. Can a state forbid express contracts to
pay /ess than the reasonable value of the services or some other
amount that reflects the state’s judgment of what is a necessary
payment to make quality health care accessible and affordable?
Can a state protect those hospitals that are without competitive
bargaining power from being coerced into accepting less than
may be necessary to fund their operations ”*

If a state, without offending ERISA, can establish maxi-
mums that hospitals may charge, then it must be that it can fix
minimums that patients must pay. Wherever the line is to be
drawn between what does and does not “relate to” an ERISA
Plan, there is no evidence of a Congressional intent to place it
between a state’s power to establish a ceiling and its power to
prescribe a floor.”

If there is no preemption of “run-of-the-mill” state law
causes of action to enforce implied or express contracts (see p. 9,
supra), there is no preemption of state hospital rate-setting
statutes. Both the common law and statutory rights would “relate
to” and have a “connection with” an ERISA Plan in like
measure. Enforcement of the maximum/minimum charge
established by a state’s judges or its legislators equally serves or
disserves Congress's purpose in enacting ERISA.

* All hospitals are economically compelled to maximize occupancy so as
to cover their fixed costs, which approximate 80% of their total costs.
Many hospitals could not survive in a competitive environment because of
their enormous and disproportionate costs in providing care to the
uninsured poor, running teaching programs for interns and residents, and
capital expenditures to replace aging plant and equipment.

* If, somehow, only the State’s minimum charge were preempted,
presumably the maximum would have to increase so as to offset the loss
of revenue and permit the hospital to survive. New York's hospital rate
regulation is not only comprehensive but integrated: the ceilings depend
on the floors. The freedom of some plans with substantial bargaining
power to pay less at the expense of other plans would seem to be an
obscure objective of the ERISA legislation.

15

Cc. The Indirect Economic Impact of State Rate-Setting
Systems Is Alone Insufficient to Result in Preemption

The Second Circuit held the New York differentials
preempted because (i) they forced plans to either increase costs
or reduce benefits “and this substantial economic impact could
be enough to result in preemption,” and (ii) they purposely
interfere with the choices that ERISA plans make for health
coverage. 14 F.3d at 719-21. Putting aside the specific
differentials for the moment (see Point III, infra), the proposition
that the indirect economic impact of a state rate-setting system is
sufficient to trigger preemption is insupportable, unsupported by
any decision of this Court, and plainly contrary to Congressional
intent.

'© After summarizing the general ERISA preemption jurisprudence
established by this Court, the Second Circuit did not rely, directly or by
analogy, on any decision of this Court as support for its conclusion.
Instead, it relied on a series of lower court cases that provide no support
for the proposition that an indirect economic impact alone is sufficient to
preempt. In each case, a tax or other legal obligation was imposed directly
on the plan. E-Systems, Inc. v. Pogue, 929 F.2d 1100 (Sth Cir.), cert.
denied, _ U.S. _, 112 S. Ct. 585 (1991) (tax imposed on administrative
fees directly based on benefits paid by ERISA plan; plan itself liable if
administrator does not pay; specific Congressional intent found to preempt
state taxes on plans); National Carriers Conf. v. Heffernan, 440 F. Supp.
1280 (D. Conn. 1977) (tax on plan benefits paid out); Morgan Guaranty
Trust Co. v. Tax Appeals Tribunal of Dep't of Tax. & Finance, 80 N.Y .2d
44, 587 N.Y.S.2d 252 (1992) (direct gains tax on sale of ERISA property);
National Elevator Indus., Inc. v. Calhoun, 957 F.2d 1555 (10th Cir.), cert.
denied, _ U.S. _, 113 S. Ct. 406 (1992) (minimum wage law uniquely
affecting plans, imposing requirements directly on plans and favoring one
plan over another); Jn Re Michigan Carpenters Counsel Health & Welfare
Fund, 933 F.2d 376 (6th Cir.), cert. denied, _U.S._, 112 S. Ct. 585 (1991)
(corporate reorganization law allowing employers unilaterally to alter their
obligations to plans in direct conflict with ERISA’s substantive
provisions); General Electric Co. v. New York State Dep't of Labor, 891
F.2d 25 (2d Cir. 1989) (law mandating employers to pay particular
benefits).

16

1. Indirect Economic Impact, National Uni-
formity, and Administrative Burdens

As Fort Halifax concluded, Congress’s purpose was to
exempt plans from a conflicting patchwork of inconsistent state
regulations that would impose increased administrative costs and
burdens upon plans. (See p. 6, supra.)

Lack of uniformity in the costs of hospital services is, of
course, an immutable fact of life. There is variation nationally:
some state systems are cost-based; some are charge-based; some
are prospective and based on DRGs; and in some states rates are
completely unregulated. Medicaid and Medicare have different
systems that recognize geographic differences. Within a state,
hospitals’ charges and rates differ, depending on a wide variety
of factors. Within a hospital, each patient will be charged
differently in accordance with the kind and extent of the services
rendered.

In the absence of any state rate regulation, uniformity in the
costs of doing business — if, indeed, that were a goal of ERISA
— would still be unattainable: the hospitals’ self-determined
charges, or as established on a quantum meruit basis, will
produce disparate results across state lines and within a state.
And the administrative burden upon a plan of paying different
prices for each of its participants’ hospital bills is unavoidable
and slight: a different amount is entered on each check issued.

In United Wire (995 F.2d at 1194), the Third Circuit agreed
with Rebaldo’s conclusion that there “is no valid reason why
employee benefit plans cannot be subject to national uniformity
despite dissimilarities in their costs of doing business,” and that
in the absence of state regulation rates will still not be “uniform,
even as between hospitals in the same locality.” 749 F.2d at 139.

It cannot seriously be contended that lack of uniformity and
the administrative burdens that result therefrom are sufficient to
preempt a state’s rate-setting system. Indeed, that was not the
basis for the decision below. Rather, the Court below based its
decision on the relationship between price and plan benefits.

17

2. Indirect Economic Impact and Plan
Benefits

State-regulated hospital rates have a “connection with”
commercially insured ERISA plans as follows: patients are
charged (and are liable for) the established price; the plan
assumes, through its insurer, whatever portion of the patient’s
liability it chooses; increases in hospital prices may lead to
increased insurance premiums; the greater a plan’s costs, the
fewer benefits may be available unless the employer increases
funding. This connects with plans in “too tenuous, remote or
peripheral a manner” to result in preemption. Shaw v. Delta Air
Lines, Inc., 463 U.S. 85, 100 n.21 (1983).

First, while ERISA preempts laws relating to “plans” and
not “benefits,” it is now established that states may not prescribe
the types of benefits that plans must pay. (See p. 6, supra.) But
this Court has never held that a law is preempted simply because
it affects the price of benefits — as does a state-reimbursement
system — and thereby may influence a plan’s decision as to its
selection of benefits and the extent of coverage.

Second, if the indirect economic impact of state-mandated
rates is enough to preempt, then the common law remedies to
enforce an unregulated price must fall as well: requiring the
patient to pay anything will have a substantial economic impact;
exemption from liability or prepayment before services is the
only solution (p. 11, supra).

Third, if indirect economic impact is the test, the scope of
preemption cannot be limited to regulation of hospital prices, but
must also encompass all other state laws that increase, directly or
indirectly, the plans’ cost of doing business. In United Wire (995
F.2d at 1193-94), the Third Circuit quoted Rebaldo’s analysis as
follows:

“A preemption provision designed to prevent state inter-

ference with federal control of ERISA plans does not

require the creation of a fully insulated legal world that
excludes these plans from regulation of any purely local
transaction.

18

* * *

The purchase of hospital service is like the purchase of
public utility service, or of any other service or com-
modity whose price is controlled by the State. Insofar as
the regulation of hospital rates affects a plan’s cost of
doing business, it also may be analogized to State labor
laws that govern working conditions and labor costs, to
rent control laws that determine what employee benefit
plans pay or receive for rental property, and even to
such minor costs as the Thruway, bridge and tunnel tolls
that are charged to plans’ officers or employees. In
short, if ERISA is held to invalidate every State action
that may increase the cost of operating employee benefit
plans, those plans will be permitted a charmed existence
that never was contemplated by Congress. Where, as
here, a State statute of general application does not af-
fect the structure, the administration, or the type of
benefits provided by an ERISA plan, the mere fact that
the statute has some economic impact on the plan does
not require that the statute be invalidated.”

See also Lane v. Goren, 743 F.2d 1337, 1340 (9th Cir. 1984)
(“state laws and municipal ordinances regulating zoning, health,
and safety increase the operational costs of ERISA trusts, but no
one could seriously argue that they are preempted”).

Rebaldo’s observations are self-evidently true and remain
“good law,” notwithstanding that a different portion of its
analysis was later rejected by this Court.'' If economic impact is

"' Rebaldo concluded that, on the basis of ERISA § 514 (c)(2), a state law
must “purport to regulate” a plan to be preempted. This interpretation was
rejected in Ingersoll-Rand Co. v. McClendon, supra, 498 U.S. at 484.
United Wire concluded that Rebaldo’s reasoning otherwise “remains
persuasive,” and would have been decided the same way post-/ngersoll-
Rand. 995 F.2d at 1194. In the instant case, the Second Circuit disagreed,
erroneously finding that its “fundamental premise” was undermined and

(Footnote continued)

19

the preemptive trigger, there is no end to the laws that must fall.
Beyond direct state regulation of hospital rates, there are
innumerable state laws that result in increased hospital costs that
must be passed on to patients — minimum staffing require-
ments, adherence to sanitary standards, and the like. As United
Wire observed, state regulation of the disposal of medical wastes
“can significantly increase a hospital’s cost of doing business
and, accordingly, its billing to plan participants.” The Court
nevertheless concluded that “ERISA was not intended to
foreclose a state regulation of this kind.” 995 F.2d at 1196.'”

Similarly, because laws that give an advantage to plans are
equally subject to preemption (Mackey, supra, 486 U.S. at 829),
the “economic impact” of state laws limiting rates or even hospi-
tals’ costs — e.g., disallowing reimbursement for an unauthor-
ized MRI machine — would also be unlawful. After all, as the
logic of the “economic impact” theory goes, the lower hospital
costs might enable a plan to increase the level of benefits to its
participants.

Nor, if the test for preemption is economic impact, can the
inquiry logically be confined to those laws that influence the
price of what plans purchase. An equal impact on the plan
results from those generally applicable state laws that affect
contributions to plans. Taxes, environmental compliance
requirements, safety standards, and the like, all have a strong
impact on employers’ profits and derivatively on contributions

“jts analysis is poisoned by its discredited belief” that a law must “purport
to” regulate plans.

'? Indicative of the Second Circuit's view of ERISA preemption and the
scope of the instant decision, is that Court’s recent Opinion in NYSA-ILA
Medical & Clinic Serv. Fund v. Axelrod, 27 F.3d 823 (2d Cir. 1994). The
Court there invalidated New York’s 0.6% tax on the gross receipts of all
health care facilities because it was applied to two facilities that were
owned and operated by ERISA plans. If “economic impact” alone were
sufficient to preempt, it would follow that these facilities would be exempt
from costly requirements, for example, that only licensed physicians could

perform surgery.

20

that they can and/or will make to fund their plans. Rebaldo
spoke to such laws as directly applied to plans, but the same
economic impact influences plan benefits when consideration is
given to contributions by employers — or even by employees.

In Firestone Tire & Rubber Co. v. Neusser, 810 F.2d 550
(6th Cir. 1987), a municipal income tax was challenged to the
extent that employees’ contributions to ERISA plans were made
subject to the tax. The Court rejected the claim that the tax’s
influence on employees’ contribution decisions required
preemption. It concluded that the tax “affects Firestone
employees in their capacity as employees, without regard to their
status as participants in an ERISA plan,” and any effect on plans
is incidental and remote. Jd. at 556. The Second Circuit's
economic impact rationale would apparently dictate a different
result.

The statute itself provides helpful guidance in discerning
Congress’s intent as to the preemption of laws solely on the basis
of their indirect economic impact on plans. In 1983, Congress
amended ERISA so as to exempt portions of Hawaii’s Prepaid
Health Care Act, but made clear that this exemption did not
shield state tax laws from preemption. The amendment provided
that nothing in the Hawaii exemption shall be construed to
exempt from the general § 514(a) preemption provision “any
State tax law relating to employee benefit plans.” §
514(b)(5)(B\(i) (emphasis added) [29 U.S.C. § 1144(6)(5)(B)(i)).

Assuming that “relating to” in § 514(b) has the same
meaning as “relate to” in § 514(a); that Congress intended to
preempt equally expansively with respect to “laws” and “any
State tax law”; and that Congress did not intend to preempt state
income taxes on employers or employees, notwithstanding their
indirect economic effect on plans — it is therefore difficult to
see how state laws that affect the price of what plans purchase
are preempted. Tax laws affect employers and employees
without regard to their status as plan sponsors or participants.
Rate-setting laws affect patients (and derivatively their plan or
non-plan insurers) in their capacity as patients without regard to

21

their participation. Both costs and revenues may affect plan
benefit levels, and the economic impact of state laws on each
side of the ledger has an equal — and equally tenuous —
connection with plans.

The problem that inheres in finding indirect economic
impact, standing alone, a sufficient “connection with” plans to
warrant preemption is that there is essentially no limit to state
laws that impact — positively or negatively — on plans’ costs of
doing business or contributions to plans. Difficulties of
application aside, such a test for preemption has never been
adopted by this Court and was never intended by Congress. The
economic impact of a state law — even a substantial economic
impact — without more, is insufficient to preempt, just as this
Court held in Mackey, supra, 486 U.S. at 832. In the case of a
state hospital rate reimbursement system there is no more.

D. Congress Did Not Intend to Limit States’
Control of Hospital Costs and Rates

That Congress intended to preempt broadly in connection
with ERISA plans is not the end of analysis, because Congress
also intended to accord states wide latitude and flexibility in
devising reimbursement systems so as to control and equitably
apportion the costs of health care.

Rebaldo examined at length Congressional intent with
respect to both subjects (749 F.2d at 135-38), but the Court
below did not. If the quest is to discern an “unmistakable”
Congressional intent to preempt (Alessi, supra, 451 U.S. at 522),
that examination cannot ignore 25 years of Congressional
encouragement of state cost control and rate-setting systems.
And such a review precludes the conclusion that Congress
actually intended to preempt state rate-setting systems that
establish the rates paid by plan participants. The broadest
reading of “relate to,” the most expansive view of “connection
with,” and the fullest appreciation of the effect of “economic
impact,” cannot lead to that conclusion.

22

If Congress intended to preclude states from regulating
hospital rates for nongovernmental payors, then Congress has
repeatedly wasted its time in 1967, 1980, 1983, and 1990
conducting hearings, writing reports, and enacting provisions
concerning the authority of the Secretary of Health and Human
Services to waive federal Medicare requirements so as to allow
Medicare payments to be set by state reimbursement systems. If
such state reimbursement systems became unlawful in 1974
with the enactment of ERISA, it is impossible to explain why
Congress would continue thereafter to refine the waiver
authority in minute detail.

As more fully shown in the Brief of Petitioner Hospital
Association of New York State (to which we respectfully refer
the Court), Congress recognized that all-payor systems served to
control costs, first encouraging and later mandating the Secretary
to include Medicare in such systems upon a state’s request.
Indeed, New York’s all-payor system was itself reviewed in
1983 in connection with an expansion of the Secretary’s
authority. Moreover, it is impossible to reconcile a supposed
Congressional intent to preempt states’ rate-setting power with
its enactment of a “Special Rule” that specifically approved New
York’s uncompensated care reimbursement system — pursuant
to which all payors were required to contribute — as satisfying
the Medicaid “disproportionate share” requirement. 42 U.S.C.
§ 1396r-4[e].

In light of Congress’s specific approval of New York’s
requirement that all payors share in the costs of uncompensated
care, it simply cannot be that Congress intended, sub silentio, to
exempt ERISA participants and their insurers from participation.
It cannot be that Congress’s 25-year review and modification of
the Secretary’s authority to participate in state all-payor reim-
bursement systems was an exercise in futility because Congress
intended all-payor systems to be unlawful. Congress’s extensive
post-ERISA initiatives for state all-payor rate-setting systems

23

make it impossible to conclude that it intended to preempt state
hospital rate-setting.'*

It

ERISA DOES NOT PREEMPT A
STATE’S POWER TO ESTABLISH
DISPARATE HOSPITAL RATES

If state laws that establish mandatory and uniform hospital
rates for patients do not have a sufficient connection with an
ERISA plan to result in preemption, does a system with
disparate rates somehow cross the line? Such disparate rates
result from the application of the differentials here at issue.
Unlike the 11% and 9% differentials (as to which amici take no
position), the revenue generated by the 13% differential is
retained by the New York hospitals and applied to meet their

costs of operation.

A. Disparate Rates and the Goals of State Rate-
Setting

As noted above, the basic goal of state rate-setting is to
assure access to quality health care at a reasonable cost for all of
the state’s inhabitants. States must retain regulatory flexibility in
devising reimbursement systems that will not only control costs,
but will produce sufficient revenue for hospitals that are required
to meet ever-increasing demands for medically intensive and

'’ Beyond evidence of a Congressional intent not to preempt a state's rate-
setting power, the Secretary's waiver authority would save an all-payor
system from preemption by virtue of ERISA § 514(d), which provides that
no ERISA provision shall “impair or supersede any law of the United
States.” Judge Van Graafeila. © correctly concluded in Rebaldo, 749 F.2d
at 139-40, that a finding of preemption would impair the Secretary's
authority. (The remainder of the Court took no position on the issue.) The
point is that if states’ rate-setting power is preempted, if “all-payor”
systems cannot lawfully exist, there is no system that the Secretary could
choose to adopt in lieu of standard Medicare reimbursement principles
The authority to waive becomes a fiction. The concept of impairment is
certainly broad enough to encompass nullific tion.

24

expensive services for a growing geriatric population, for AIDS
and TB patients, and for drug abusers and their victims.

In the absence of state regulation, a hospital's self-
determined charges will be set to attempt to generate sufficient
revenue to meet its needs. Whatever costs are unmet by virtue of
inadequate Medicare and Medicaid rates, and by serving the
uninsured, they will be shifted to paying patients — at least by
those hospitals with a strong competitive bargaining position.
The lack of a strong incentive to control costs by such hospitals
was a principal basis for Congress’s er..»:"agement of all-payor
systems. For many hospitals that serve a high volume of
Medicaid and uninsured patients, such as urban hospitals, cost-
shifting is not a realistic alternative funding source. Without
State regulation, their continued existence would be threatened
and the goal of access to quality care for all citizens would be
undermined.“

The history and purpose of the 13% differential are fully
described in Petitioners’ Briefs and demonstrate that the provi-
sion of lower rates for Blue Cross patients is an appropriate
exercise of the State’s power to establish rates generally because
the differential touches upon the goals of both cost control and
access. As to cost control, the initial purpose of the 13%
differential was to limit and make uniform the shifting of costs to
commercially insured patients, and to recognize the Blues’
prepayments to hospitals for working capital. As to access, the
financial stability of the Blues is essential to produce sufficient
hospital revenues: without such coverage of otherwise

‘* In New England Health Care, supra, 846 F. Supp. at 196 n.9, the
District Court invalidated Connecticut's Uncompensated Care Assess-
ments and observed that, without state rate-setting, ERISA plans would be
free to encourage their participants to avoid urban hospitals that incurred
relatively large uncompensated care costs. It seems unlikely that the
destruction of hospitals that principally serve the poor was Congress's
intent in preempting state laws that relate to plans.

25

uninsurable patients, hospitals’ uncompensated care would rise
dramatically.

By establishing lower rates for the Blues (and continuing the
historic discount), New York has made appropriate provision for
the higher costs incurred by the Blues’ high-risk and high-cost
patients that result from the State-mandated open enrollment
policy, has attempted to provide financial stability for this vital
insurer so as to make affordable insurance available through the
community rating requirement, and, in the process, has neither
transgressed any legitimate ERISA concern, nor crossed the line
between tenuous and proscribed state action.

In terms of the goals of rate-setting, New York's reim-
bursement system operates as a unified whole. The challenge
here to the 13% differential is, however, highly selective: the
commercial insurers seek to excise one tree from the forest of
regulatory provisions while retaining the benefits of state control
of hospital costs and permitted charges — here, the base DRG

rate. But if, for ERISA preemption purposes, a state can lawfully
establish uniform rates, there can be no difference when it sets
disparate rates so as to generate sufficient hospital revenue to
provide access to quality care. Cost control and access cannot be
so easily separated by ritual incantations of the breadth of
ERISA’s preemptive sweep — particularly in light of Con-
gress’s recognition of payor differentials within all payor
systems.

As shown in the Brief of Petitioner Hospital Association of
New York State, Congress reviewed and specifically approved
New York’s all-payor reimbursement system in connection with
the 1983 Medicare Amendments. And that New York system did
not provide for uniform rates. Blue Cross received a discount of
12%-15% as compared to commercial insurers. N.Y. Pub.
Health L. § 2808-c(1) & (6).

26

B. The Differentials Do Not Relate to ERISA
Plans

1. “Reference To” and “Depend Upon”
The patients subject to the 13% differential include:

“patients eligible for payments pursuant to the workers’
compensation law, the volunteer firefighters’ benefit
law, the volunteer ambulance workers’ benefit law or
the comprehensive motor vehicle insurance reparations
act; or enrolled in a self-insured fund which provides for
reimbursement directly to general hospitals on an ex-
pense incurred basis, . . . or insured under a commercial
insurer licensed to do business in this state and author-
ized to write accident and health insurance and whose
policy provides inpatient hospital coverage on an ex-
pense incurred basis, and the insurer makes payments
directly to the general hospital .. . .” [N.Y. Pub. Health
L. § 2807-c(1)(b)).

The statute, on its face, does not refer to an ERISA plan
or accord different treatment to plan participants in the same
category as nonparticipants. Nor does the statute in its operation
accord different treatment: commercially insured patients are
liable for, and the insurer will pay, 113% of the DRG rate,
regardless of their participation in an ERISA plan. Patients with
Blue Cross or HMO coverage will not pay the differentials,
regardless of their participation.

The result oi the Decision below is to require different
treatment: those patients eligible for benefits, for example, under
the workers’ compensation law and who are plan participants
will pay less than similarly eligible nonparticipants. Congress
did not intend to confer such a “charmed existence” on these

patients

'S Ironically, if the New York statute expressly incorporated the result
below — “all ERISA plan participants are exempt from the differentials”
(Footnote continued)

27

Accordingly, the statute does not depend upon the existence
of an ERISA plan for its operation. That conclusion is not
altered by the fact that many plans are commercially insured or
that it is anticipated or desired that plans might choose to switch
coverage. In that connection, the Third Circuit observed in
United Wire, supra, 995 F.2d at 1192 n.6, that it disagreed

“that a statute should be preempted solely because
the participation of ERISA plans is required as a
matter of economics in order for the statute to meet
its social goals. This is not what we understand the
Supreme Court to have meant in Greater Washington
Board of Trade when it held that statutes predicated
on the existence of ERISA plans ‘relate to’ such
plans. The statute in that case could not be applied
without reference to the ‘coverage levels set forth in
ERISA plans.’ As we understand it, it is of no legal
consequence if removing ERISA plans from the
scene would diminish the likelihood that the statute

would meet its social goals. Rather, the test for pre-
emption in this regard is whether the existence of
ERISA plans is necessary for the statute to be mean-
ingfully appiied. Greater Washington Board of
Trade, _ U.S. at __, 113 S. Ct. at 583-84.”

If the New York statute is found to depend upon the
existence of an ERISA plan, difficult questions arise in terms of
future application of such a standard. Does preemption hinge
upon the market share of Blue Cross vs. commercial insurance?

— it would be preempted because it referred to an ERISA plan. Mackey,
supra. The result would be that plan participants would have to pay the
same rate as other commercially insured patients who are not participants.
But the statute's silence as to ERISA participation does not save it from
preemption, according to the Couri beiow, because the only lawful result
is, indeed, that participants pay less than nonparticipants. And, implicitly,
the only way to accomplish that is to have the result published in F.3d
rather than in McKinney's New York Statutes. This is the necessary
consequence of the ruling below.

28

That is to say, if 90% of all ERISA plans within a state had
chosen the Blues for coverage — and benefitted from its lower
rates — would the differential be barred because 10% of the
plans elected commercial insurance with higher rates? Would
the preemption consequences differ from state to state depend-
ing on market share? The point is that the differentials may
make commercial insurance companies unhappy, but they do not
restrict a plan’s freedom of choice as to coverage, much less its
choice of the type of benefits offered.'®

2. Structure, Administration and
Economic Impact

Ignoring the discrimination that its holding produces within
the category of patients subject to the differential, the Second
Circuit focussed instead on the differences between commercial
rates and Blue Cross rates. It held that because the differential
increased the costs of commercial insurance and made such
insurance less competitive with the Blues, an ERISA plan’s
health care benefits and its choices of coverage are purposely
interfered with. Accordingly, it held that the “indirect economic
impact upon ERISA plans was substantial and impermissibly
affected the structure, the administration, or the type of benefits
furnished by a plan.” 14 F.3d at 708. This analysis and its
conclusion are unsustainable for several reasons.

To the extent the reference to “structure” and “adminis-
tration” of plans means to reflect a concern for administrative
burdens flowing from lack of national uniformity, no such

© Elimination of the differential will effectively force the State to provide
for uniform rates (if that power is not preempted), but the need to provide
sufficient revenue to the hospitals could well lead to an increase in the
Blue Cross rate. ERISA plans that have chosen such lower-cost coverage
will be disadvantaged. If, as the Second Circuit concluded, making Blue
Cross coverage more attractive is preempted, would a new law making
such coverage relatively less attractive similarly be preempted? After all,
plans with Blue Cross coverage will face increased costs, which might
result in a reduction of benefits.

29

burdens result from the differentials and national uniformity is
not an issue. There are no differences in this regard between
State rate-setting statutes that mandate uniform rates and those
that produce disparate rates. (See p. 16, supra.)

Similarly, if economic impact is insufficient to preempt
mandatory uniform rates, it is insufficient to preempt disparate
rates. (See pp. 17-21, supra.) It cannot make a difference, for
ERISA preemption purposes, that a hospital bill is $1,000 or
$1,130. Both bills — among countless other factors ... .ermining
price — may affect a plan’s choice as to the level of benefits it
will provide, but how either price affects “the type of benefits
furnished by a plan” (14 F.3d at 708, emphasis added) is a
mystery.

The commercial insurers have asserted that the higher costs
imposed upon them by virtue of the differentials will cause them
to pass such costs onto ERISA plans. /d. at 720. But wholly
apart from the many factors that establish hospital prices, and the
many choices that plans have for their insurance coverage,'’
there are countless state laws that impose requirements upon
commercial insurers — if that is the plan’s choice — and affect
the premiums they charge. It would appear to be difficult to
distinguish between the differentials (which favor the Blues) and
State income taxes (from which the nonprofit Blues are exempt)
in terms of the economic impact on commercial insurers and
derivative impact on plans that choose commercial insurance for
coverage. Both laws create costs that may be passed on to plans
(and non-plan insureds) and, it can be argued with equal fervor,

'’ Plans may insure with Blue Cross at the DRG rate, obtain commercial
insurance at 113% of the DRG rate (or 111% for prompt payment), insure
through an HMO which pays either a negotiated rate or 113% of the DRG
rate, self-insure and pay either 113% of the DRG rate for direct payment
or hospital charges (higher or lower than the DRG rate) for indirect
payment. N.Y. Pub. Health L. § 2807-c(11\e).

30

that plan benefits may thereby be reduced.'* If the “connection
with” such income taxes and plans is too tenuous to trigger
preemption, so too is the case of the differentials.

Conclusion

In the end, if the states’ power to establish mandatory
hospital rates, including disparate rates, is preempted, if the
Second Circuit’s analysis is correct, the issue before the courts
would no longer be whether a law “relates to” an ERISA plan,
but whether there is any state law that does not.

However broadly Congress intended to preempt state laws
that interfered with the efficient operations and choices of
ERISA plans, it did not mean to restrict states in their efforts to
provide full and equal access to health care services for all of
their inhabitants through the equitable regulation and apportion-
ment of hospital costs. And it did not intend the result below.

For all of the foregoing reasons, the American Hospital
Association, the Maryland Hospital Association, Inc., and the
Massachusetts Hospital Association, Inc., as Friends of the
Court, respectfully urge this Court to reverse the decision of the
Second Circuit Court of Appeals.

'S As noted above (p. 15n), the Second Circuit relied on several lower
court decisions holding state tax laws that directly applied to plan
operations or income to be preempted. Whatever the validity of those
cases, state tax laws imposed on commercial insurers are one step
removed and the connection is one step more tenuous. The differentials,
reflected in bills to patients that inay or may not be covered by
commercial insurance, are two steps more tenuous.

Dated: November 16, 1994

Of Counsel:

FREDRIC J. ENTIN
JAMES A. HENDERSON
MARGARET J. HARDY

AMERICAN HOSPITAL
ASSOCIATION

One North Franklin

Chicago, Illinois 60606

(312) 422-3000

JEROME G. GERAGHTY
FRANCINE R. STRAUSS

BLADES & ROSENFELD, P.A.
1200 Sun Life Building
200 South Charles Street
Baltimore, Maryland 21201

(410) 539-7558

WILLIAM T. MCGRAIL
DOROTHY GRANDOLFI W AGG
AMY L. STAMPFER

MASSACHUSETTS HOSPITAL

ASSOCIATION, INC.

5 New England Executive Park

Burlington, Mass. 01803
(617) 272-8000

Respectfully submitted,

PETER F. NADEL
Counsel Of Record
DAVID A. FLORMAN
JOSEPH V. WILLEY
BARBARA QUACKENBOS

ROSENMAN & COLIN
575 Madison Avenue

New York, New York 10022
(212) 940-8800

Attorneys for the American
Hospital Association, the
Maryland Hospital
Association, Inc., and the
Massachusetts Hospital
Association, Inc.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385013_0496%3A21. Public record. Not legal advice.